Valuations may have peaked while consolidation continues

As we get into the stride of 2007, it is both gratifying and salutary to note the continuing rise in the market for healthcare services businesses after nearly five years of buoyant merger and acquisition activity in the sector. Gratifying because the value created by caring, hard working people looking after some of the most vulnerable in the community has been recognised; salutary because sooner or later valuations will peak and then may fall as the cycle turns. Perhaps the highly leveraged sale of HCA in the US for $33 billion did in fact mark the peak. In the UK alone, 2006 saw some Â£5 billion of healthcare deals completed. A December report on Southern Cross from Investec estimated the healthcare services sector to be trading on an annualised price to earnings (expected for full year 2007) ratio of 19.7x. Why so much activity and at such valuations? The main reason is that customers (mainly local authorities) purchasing services from care companies are more focused than ever on cost and on quality and m